Britain is falling badly behind in the entrepreneurship stakes

Allister Heath was Editor of City A.M. for six years up until June 2014.

Allister Heath

ONE OF Britain’s great advantages is that we are meant to be a much more entrepreneurial nation than most of our major competitors. We do, indeed, create more companies than some other wealthy countries but as a study by RSM reveals, we are hardly covering ourselves in glory. In fact, we are ranked a pathetic 24th out of 35 nations surveyed for 2007-2011.

Over the last five years, the UK has seen a net gain of just 63,000 active businesses, an annual growth rate of 0.7 per cent. By contrast, the European countries surveyed posted an average annual compound growth rate of 1.4 per cent over the same period (though that figure is exaggerated by strange going-ons in France, where a temporary tax advantage a few years ago led many self-employed to incorporate). The Brics economies have surged ahead, creating 4.8m new enterprises since the global financial crisis, a growth rate of 5.8 per cent per annum.

Needless to say, we are being thrashed by the likes of Singapore, India and Hong Kong – but we are also being beaten by Switzerland, the Netherlands, New Zealand, Belgium, Norway and Australia, for which there is no excuse. The “good” news is that we are doing better than Germany, the US, Canada and Japan.

Looking at 2011 in isolation, Australia registered higher overall rates of business births and deaths (13.5 per cent and 13.1 per cent) than the UK (11.2 per cent and 9.8 per cent). Total business birth/death rates in the US fell between those of Australia and the UK (11.4 and 10.9 per cent). None of this is satisfactory, and the UK desperately needs policies to increase entrepreneurship.

The RSM report is also emphatic about another problem: its research “lends empirical weight to recent press coverage of zombie companies in Great Britain”, confirming the existence of significant numbers of struggling, technically solvent, highly indebted companies that generate just enough cash flow to service interest payments on loans and that are hugely vulnerable to hikes in interest rates.

What Britain and every other country needs, of course, are successful new businesses, the so-called fast-growing gazelles that create a disproportionate number of jobs. In the latest study to highlight the importance of job creation by small firms, Bob Butcher and Matt Bursnall from the National Institute of Economic and Social Research document for the first time what actually happened during the recent crisis years. Before the recession, jobs were created at a rate of 4m per year, and were lost at a rate of 3.7m, resulting in annual net job creation of 300,000. Between 2008-2011, however, 3.6m jobs were created every year, and 3.8m lost, leading to annual net job losses.

The difference was that job creation at new workplaces, primarily small firms, fell by 400,000, while job losses at contracting employers went up by 100,000. Everything else remained the same.

So we need more healthy start-ups that want to hire staff. For that we need a better, pro-growth tax system that no longer viciously double or triple taxes so many income flows, including from capital, and allows workers and investors to keep more of their money; a freer labour market, making it as riskless as possible for firms to hire people (reforms to reduce the frivolous use of employment tribunals are a step in the right direction); a shift from debt to equity financing for small firms, allowing them to grow even in an environment of permanently scarcer credit; an immigration policy that welcomes job-creating migrants; a transformed and commercialised higher education system that works much better with business and start-ups; and more liberal planning laws that reduce the costs of housing and office space. Britain has been sitting on its entrepreneurial laurels for far too long. The RSM study is a wake-up call; now is the time for radical action.